Art Stevens (L) and Rich Jachetti co-authored this article.
It was the best of acquisitions, it was the worst of acquisitions, it was the age of private equity, it was the age of the roll up, it was the epoch of newcomers, it was the epoch of early retirements, it was the season of high margins, it was the season of bolt-ons, it was the spring of hope, it was the winter of despair, we had everything before us…
Our thanks to Charles Dickens for not turning over in his grave as we borrow his hallowed language to describe the game-changing PR agency acquisition marketplace in 2018. The world of PR agency acquisitions took new twists and turns this past year from subordinating the tired old valuation-driven accountancy model of yesteryear and transforming it into a multi-layered process replete with new and vibrant acquisition models driven by demands from buyers for PR agencies with 21st century integrated marketing services strategies and capabilities.
We at TSG found ourselves on the front lines of a new PR agency acquisition zeitgeist and there seems to be no turning back. PR agency management is being drawn inexorably into deals comprised of evolving market factors that demand that agency CEOs place their highest priority when making an acquisition, or when selling their agency, on the growth and diversification needed to keep their agencies up to speed — even ahead of — their clients’ increasing demands for performance and accountability. This trend has driven even further the transition of the whole idea of what a PR agency is and has sent that question roaring into a new era where the very practice of public relations is being redefined.
For these reasons among others, it was a robust year for PR agency acquisitions, both large and small. There were many new buyers availing themselves of the opportunity to acquire and grow. And with more buyers came a flood of new sellers seeking access to bigger and better growth opportunities.
Another major takeaway of 2018 in the PR agency M&A marketplace was the sheer number and variety of new buyers on the hunt to acquire PR firms. Private equity firms jumped into the acquisition arena more aggressively than ever in 2018. At one point the world of private equity considered the PR agency industry to be too small to consider. But with hundreds of billions of dollars languishing on investment company balance sheets and PE firms hungrier than ever to find new markets for their new-found capital to invest, public relations agencies have gotten more glamorous and desirable for these solely money-making focused enterprises as they watch the former step-child of the marketing services landscape become the darling of the C-suite.
We saw more savvy buyers turn their acquisition attention to PR firms with profit margins in excess of 30 percent. And we saw more agencies of all revenue sizes hitting those margins in 2018. We saw buyers preferring management of seller agencies who think and act less like tacticians, publicists, event planners and crisis managers and more like businesswomen and men hell-bent on growing their firms. What’s more, we saw a small but growing number of very large independent PR agencies make deals with outside investors in 2018. We saw PE firms take equity positions in these firms and help bankroll acquisitions, oversee and help stimulate growth of their new asset(s) both organically as well as through acquisitions … where three to five years down the road the new owners sell the now evolved agency assets they acquired to ever larger buyers, including larger PE firms who will continue this same process far into the future …
All of this means that the stage has been set and many of the independent PR agencies with the foresight to see what’s on the horizon, or rather what’s already right at their doorstep continue to grow rapidly, and as a result there was consolidation in our industry in 2018. We predict much more to come in the years ahead.
Another fascinating trend we saw last year is the re-emergence of the roll up — the brainchild and province of Peter Gummer and Shandwick. We saw individual entrepreneurs looking to make an impact build their case to wealthy investors and convince them that with a lot of hustle and gallons of elbow grease they could build brand new $50 million PR holding companies themselves, thus creating a new sellers’ paradise for PR agency principals. These new roll ups are amassing a war chest of funds that will make buyers even richer, and give the sellers a second big bite of the apple in the final years of their earn out.
Sellers are motivated because money talks. We saw new, visionary buyers willing to not only meet current purchase price parameters in PR agency acquisitions, but exceed them. Bottom line: the market determined the valuation of a seller agency, not the other way around. We predict the PR agency community will see many more buyers willing to pay a premium for firms whose culture and service offering meet the demands clients are placing on buyers.
Conversely, an early exit strategy is hardly the reason why most sellers we worked with were anxious to find a strategic buyer for their firms. Most sellers we worked with in 2018 still love what they do, they remain hungry and ambitious. And they want to not only stay on after an acquisition is consummated but play an integral role in the management of the buyers’ organizations. What hasn’t changed much over the years is the desire of many PR agency CEOs to pass on the back office and administrative responsibilities to the buyer. With the time they saved not having to think about admin headaches, CEOs are using those hours more productively to compete for new business, work with new clients, manage larger units and help grow both the firms they founded as well as contribute to the growth of the buyers’ organizations.
This latter trend was a boon to many buyers. They not only inherited coveted accounts and niches, but they inherited talented management teams and account staff, which can only help enhance the continued growth and reputation of buyer’s firm.
There’s no question that buyers were aggressively on the lookout for firms that are expert in all things digital. Competition among PR agency CEOs to find and acquire digital/interactive talent was intense. Equally vibrant in 2018 was the competition among agency owners to acquire firms in the biggest and most lucrative growth categories such as pharmaceutical/healthcare, public affairs, crisis management, technology, consumer products and financial services.
And, finally, we discovered again in 2018 that almost without exception no PR agency is too small to be acquired. Many smaller agencies bring skills and expertise in particular niches; have a foothold in a particular geographic market; and have savvy management. There’s still a premium on talent. We at TSG still marvel at how many PR agencies we identified, or who contacted us last year, who were often under the radar screen and are virtually unknown outside of their specific spheres of influence.
The PR agency world is amazing. There’s so much talent out there and it serves as a wellspring for acquisition-minded buyers. As for growth by acquisition in 2018, it was the best of times!
Art Stevens is managing partner of The Stevens Group, consultants to the PR agency profession. Rich Jachetti is senior partner at The Stevens Group. www.theartstevensgroup.com